Cloud Tracks: Q2 2017

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Includes: AAPL, ACN, AMZN, APTI, BABA, BL, CRM, DIS, FB, GOOG, GOOGL, IBM, MSFT, MULE, NEWR, NFLX, NOW, NTNX, ORCL, PI, SAP, TWLO, VMW, WDAY
by: Marty Chilberg

Summary

The Cloud is phase one of the largest macro trend since the internet.

The winners in the cloud will have a relationship advantage as the essential innovation technologies of the future are deployed.

Consumer digital transformation was the earliest phase which is now being followed by the enterprise.

The powerful macro trends of digital transformation and the internet of things are creating data. Lots of it. That data is being managed in the cloud where emerging technologies such as artificial intelligence, autonomous driving, Blockchain, drones and robotics will be deployed.

The disruptive impact of this trend was seen initially in consumer markets. Apple (AAPL) digitally transformed music with iTunes. Facebook (FB) is now where people share their pictures displacing albums. Google's (GOOGL) (NASDAQ:GOOG) YouTube has become such a music video force that MTV is almost irrelevant. Neflix (NFLX) began the transformation of video entertainment, and now, even Disney (DIS) is paying attention. The consumer led the way and now the enterprise is following suit.

Digitally transforming the enterprise is logistically far more challenging so it makes sense that it lagged the consumer markets. Tethered industries began by embracing mobility with the: bring your own device “BYOD” trend. That led to an increased awareness of security flaws. Software released more two decades ago has to be upgraded to more modern technology. Accenture (ACN), considered a leader in digital transformation consulting, has been a core Microsoft (MSFT) customer and partner for many years. Yet their upgrade to Windows 10 won’t be complete until 2018 after beginning their internal process in 2015. Impinj (PI), a low cost RFID data generator for the internet of things, just disclosed a delay in the implementation of several large customer rollouts. Why? Because those customer were in the process of upgrading their systems to utilize the data to be generated. Digital transformation is a long process which is still in its infancy.

Cloud Tracks is my term for a tracking group of cloud companies. This group includes a broad cross section of platform leaders and application providers. The platform leader is Amazon (AMZN) with a dominant position in the public cloud. Microsoft is a distant second yet growing much more quickly embracing the trend toward hybrid. Customer Relation Management “CRM” and Human Capital Management “HCM” were two of the earliest SaaS trends and are represented by Salesforce.com (CRM), Workday (WDAY), SAP (SAP) and Oracle (ORCL). Other companies in the tracking group are IBM (IBM), Netflix, VMWare (VMW), ServiceNow (NOW) AliBaba (BABA), Nutanix (NTNX), Infor, Twilio (TWLO), NewRelic (NEWR), MuleSoft (MULE), Aptio (APTI) and Blackline (BL).

Gartner released their cloud services forecast for 2017 a few months ago projecting 18 percent growth as seen in the following table.

Millions of Dollars

2016

2017

2018

2019

2020

Business Process BPaaS

40,812

43,772

47,556

51,652

56,176

Application Infrastructure PaaS

7,169

8,851

10,616

12,580

14,798

Application Services SaaS

38,567

46,331

55,143

64,870

75,734

Management and Security

7,150

8,768

10,427

12,159

14,004

System Infrastructure IaaS

25,290

34,603

45,559

57,897

71,552

Advertising

90,257

104,516

118,520

133,566

151,091

Total Cloud Market

209,244

246,841

287,820

332,723

383,355

Cloud ex Advertising

118,987

142,325

169,301

199,158

232,264

YY %

24%

20%

19%

18%

17%

Total excluding advertising used for Cloud Tracks purposes which does not include advertising revenues. Garter forecast for 2016 was $6 billion less than actual.

Gartner has predicted that by 2019, 90% of all IaaS providers will be forced out of the market by the Amazon-Microsoft duopoly. This prediction makes sense given the massive investment required in technology and regional data centers. The following chart is my estimate of the trended platform revenues from AWS and Azure. Additional detail showing how I calculated Microsoft Azure revenues can be found in my blog post.

Cloud Tracks quarterly revenues and annual growth rates are shown in the following tables.

Revenues

$ Billions

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

MSFT (1)

1.92

2.26

2.47

2.89

3.14

3.48

3.76

4.66

AMZN

2.09

2.41

2.57

2.89

3.23

3.54

3.66

4.10

IBM

2.39

3.19

2.60

3.40

3.40

4.30

3.50

3.90

CRM

1.71

1.81

1.92

2.04

2.15

2.29

2.39

2.56

NFLX

1.58

1.67

1.81

1.97

2.16

2.35

2.52

2.67

VMW (2)

1.67

1.87

1.59

1.69

1.78

2.03

1.74

1.86

ORCL (3)

0.61

0.65

0.74

0.86

0.97

1.05

1.19

1.36

SAP

0.67

0.69

0.75

0.80

0.85

0.89

0.96

1.07

GOOG (4)

0.35

0.42

0.48

0.55

0.63

0.70

0.80

0.86

WDAY (2)

0.31

0.32

0.35

0.38

0.41

0.44

0.48

0.52

NOW

0.26

0.29

0.31

0.34

0.36

0.39

0.42

0.47

BABA

0.10

0.13

0.17

0.19

0.22

0.25

0.31

0.36

NTNX (2)

0.09

0.10

0.12

0.14

0.17

0.18

0.19

0.22

Infor (2)

0.05

0.07

0.08

0.09

0.10

0.10

0.10

0.11

TWLO

0.04

0.05

0.06

0.07

0.07

0.08

0.09

1.00

NEWR

0.04

0.05

0.05

0.06

0.06

0.07

0.07

0.08

MULE

0.03

0.03

0.04

0.04

0.05

0.06

0.06

0.07

APTI

0.03

0.04

0.04

0.04

0.04

0.04

0.04

0.05

BL

0.02

0.02

0.03

0.03

0.03

0.04

0.04

0.04

Total (3)

14.16

16.27

16.35

18.68

20.05

22.28

22.32

24.77

Note 1) Microsoft totals tie to their Commercial Cloud disclosures. It does not include any Linkedin, consumer cloud or hardware revenues.

Note 2) Company revenues for the last quarter are forecast as results have yet to be released.

Note 3) Oracle revenues show exclude NetApps prior to acquisition. The total for the group includes it.

Note 4) Google revenues are rough estimates only based upon analysis of their other revenues components.

Annual Growth Rates-Organic

Y/Y Growth %

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

MSFT

64

59

64

54

52

51

AMZN

64

58

55

47

43

42

IBM

30

30

42

35

35

15

CRM

27

25

25

27

25

26

NFLX

30

33

36

41

39

36

VMW

5

11

6

9

9

10

ORCL

39

49

59

23

25

25

SAP

34

29

27

28

29

34

GOOG

64

69

79

69

68

59

WDAY

39

34

34

35

38

36

NOW

44

38

37

35

36

38

BABA

162

140

120

102

90

92

NTNX

78

89

90

77

67

56

Infor

160

128

88

40

34

22

TWLO

78

70

62

60

47

49

NEWR

57

54

48

43

40

37

MULE

94

70

64

62

56

57

APTI

21

22

26

27

19

17

BL

47

49

49

44

45

46

Total Group

39

39

42

37

36

33

Cloud Tracks cumulative revenues for 2016 were $77.4 billion, representing 65% of the total cloud reported by Gartner. The top 5 share of the group total can be seen in the following table and chart.

Group Mix

Cloud Tracks Mix %

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Sep-17

MSFT

15.1

15.4

15.7

15.6

16.8

17.6

AMZN

15.7

15.5

16.1

15.9

16.4

16.6

IBM

15.9

18.2

17.0

19.3

15.7

15.7

CRM

11.7

10.9

10.7

10.3

10.7

10.3

NFLX

11.1

10.5

10.8

10.6

11.3

10.8

Investment Thesis

Digital transformation and the emerging technologies that will transform the future will be deployed in the cloud. Cloud Track is a tracking group established to represent a cross section of the leading cloud platform and application providers in each segment. The companies that become the hosted platform and applications leaders will have a unique opportunity to leverage their market share to capture a larger share of the market opportunity generated by these emerging technologies. Macro trend investors can benefit by tracking the entire group and sticking with those that are the share leaders and/or are gaining share by growing at a rate in excess of the group.

Additional information about this trend and my analysis can be found in my blog including the latest additional content to this article.

This article represents my personal analysis and tracking and may have errors or omissions. Nothing in this article is intended as investment advice.

Disclosure: I am/we are long MSFT, GOOG, PI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may go long any of the stocks mentioned in the next 72 hours